Let's talk investment. It's a topic that isn't widely covered, and people tend to be a bit quiet about it depending on whether they've had ghost investors, angel investors or a rich uncle spotting them the cash. So we asked business consultant and Dream & Do friend Marcella Merck to dish the dirt on all things investment in this latest guest post.
The cheapest sources of cash (in order) are:
As a source of funding, the differences between the first, second and third are huge, so let’s pro and con them.
1. Self-generated cash
Pros: free, available immediately (if you have enough), you have complete discretion, you retain 100% control of your business.
Cons: it takes time to save, particularly if you are a start-up, this feels like an eternity away and it may not be there to take advantage of the earth-shattering opportunity you see right here and now. You need money to make money.
Pros: provide relatively cheap loans (approx. between 5.5% and 7.5%) compared to an investor (approx. 25%), can provide facility management guidance, provide specialised products for special purposes and help you control your finances and their costs.
Cons: they rarely if ever work with start-ups, you need at least three years trading under your belt or have proven industry experience, requires security.
Pros: will work with the right start-up, can provide large sums of money, no need for security in the same context as a bank, can provide business management guidance and resources
Cons: investors take a big stake in the business because this is their equivalent of security, require high rates of return (approx. 25%), can take over and muscle out the founder, may not actually be as clever as they initially seemed and not able to provide the sound business guidance needed, some don’t provide any guidance at all and just want a silent return this can get ugly if the business can’t deliver, can get very complex and messy.
Most people think in terms of high risk = high return, and this is exactly the context in which investments are considered. You as a start-up pose a large risk and the larger the risk, the more that will be expected of you from the person investing in you.
This means you need to think in terms of the higher the return (funding) potential the higher the risk, reverse the old saying. The more money you are able to solicit from a source, the higher the risks are for you too.
This is where things become subjective and no "one fits all" policy can be applied but in Very broad strokes you can take steps to minimise both the risk you pose and the risk you potentially take on when seeking finance by understanding exactly what source of finance is most appropriate for what you need.
What do we need the funds for? Then look at all the different funding options
Are we looking for a loan or are we looking for a business partner with equity to spend?
The purpose for the funding will dictate the source of it. By matching the right source to purpose, chances are you will make things easier to manage, cheaper and retain more control.
I personally think many businesses turn to investors as a one-stop-shop to solve all their money troubles. The consequences are many businesses ask for more than they need and relinquish more of their business than they probably need to and end up with a much higher investor bill than necessary.
Make no mistake, bank or investor, these two players are in it to make money, so you need to understand their motives and how they seek their return and then decide what is right for you.
Read all Marcella Merck's guest posts about finance in business HERE and HERE. Contact Marcella through her website www.merckbusiness.com.